Convertible Note

A convertible note is an investment vehicle often u to facilitate investing in a company establishing a valuation. This may be desirable for many reasons, including efficiency or the particular business stage (too early to attract money at an acceptable valuation or a need for cash at a point when a valuation inflection point is on the horizon).

Convertible notes are debt instruments, but most convert into equity at a later date at a conversion price that usually is subject to a conversion price discount and/or a conversion price cap. The terms of conversion typically provide that the principal amount of the note converts automatically into equity in connection with the company’s next financing, but there may be an established “minimum size of that financing to trigger automatic conversion. Additional customary terms include optional conversion if the automatic conversion terms are not met, possible conversion or premiums on a change of control, and interest.

"Discount shares" is a term sometimes used to describe the shares issued upon conversion of a convertible note or SAFE in respect of the portion attributable to the discount rate/conversion price discount.

Dollars-invested method is one of three typical methods by which the price per share of the new preferred stock is determined. The price per share of the new preferred stock is calculated by dividing the agreed-upon pre-money valuation by the fully-diluted shares outstanding at the closing, excluding only the shares of new preferred stock to be sold for cash at the closing.

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